There is no sign that investors' headaches from Europe are going away, but early indications of strong holiday spending and an improving labor market could soothe Wall Street this week.
Fears that Europe's debt crisis could spiral out of control have pushed stocks off two-year highs hit this month. Since Nov. 5, the Standard & Poor's 500 index has fallen 3.1% after climbing 17% over the previous two months.
At Friday's close, the S&P 500 was down 0.9% for the week, almost matching the Dow Jones industrial average's 1% drop.
However, those European fears have been countered by signs of a gathering recovery in the labor market at home. The government's nonfarm payroll report Friday is set to be another sign of a turnaround in hiring that could boost stocks through the end of the year.
Anecdotal evidence suggests holiday shopping got off to a good start. The S&P retail index rose more than 5% in the run-up to Black Friday, the day after Thanksgiving, when Americans traditionally take shopping malls by storm.
Retail stocks' gains are a sign of an increasingly bullish view of the U.S. consumer after a string of stronger indicators on jobs, sentiment and spending.
"The consumer is more confident, and they are spending a bit more money, and I think retail as a whole is perking up," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.
Friday's payroll report is expected to show the economy added 140,000 jobs in November, according to economists polled by Reuters. If that forecast is met, the jobs data will fit a pattern of growing strength in the labor market.
In October, companies hired at their fastest pace since April, the government's data showed, while the latest weekly initial claims for unemployment benefits have dropped to their lowest level in more than two years. November consumer sentiment rose to the highest level since June. October consumer spending also gained.
Early information on Black Friday suggested shoppers were spending and that discounts were not as deep this year as last, potentially helping to lift retailers' margins as they look for the best holiday season in three years.
Retailers will report sales at stores open at least a year Thursday, when they probably will comment on the weekend's events.
"It seems the American consumer is back with a vengeance," said Kim Caughey Forrest, a senior equity research analyst at Fort Pitt Capital Group Inc. in Pittsburgh. "If we are to believe CEOs of retailers, they feel they can support margins with prices that are attracting consumers."
Shares of Amazon.com, a favorite online retailer, have risen 12% since mid-November, and hit an all-time high of $177.25 in the middle of last week.
Europe's debt crisis could be the fly in the ointment, though. Pundits predicting the euro's demise are getting serious attention.
European Commission President Jose Manuel Barroso denied Friday that a financial rescue plan was in the works for Portugal and called a newspaper's report that Portugal was under pressure to seek a bailout "absolutely false," while Spain said it did not need help to manage its finances. But the market was less sanguine and stocks took a nose dive.
The European Union on Sunday approved an 85 billion euro ($115 billion) rescue for Ireland, an EU source said, and was set to announce outlines of a permanent system to try to resolve Europe's spreading debt crisis.
Finance ministers from the 16-nation euro zone, anxious to prevent the financial market contagion from engulfing Portugal and Spain, endorsed an emergency loan package to help Dublin cover bad bank debts and bridge a huge budget deficit.
All 27 EU finance ministers were expected to endorse the broad outlines of the longer-term plan before markets open Monday in Asia, the source said.
Kate Schapiro, who runs an international equity fund out of San Francisco, said the declines in European stocks last week had looked "really, really ugly."
Her fund owns the New York-listed stock of Spain's Banco Santander, which fell 15% last week.
Schapiro said Santander and other European stocks may be getting hit too hard and that strong companies are getting caught up in the general selling.
"At the end of the day," she said, "I think we are going to muddle through this, and this could be a buying opportunity — that's my gut" feeling.